I'm an associate editor at Forbes, part of the team responsible for our signature issues: The Forbes 400, Global Billionaires and America's Richest Families. As a writer, I cover these wealthy business builders as well as other entrepreneurs. Before Forbes, I also reported on entrepreneurs for Inc. magazine and attended Syracuse University's S.I. Newhouse School of Public Communications.

Dell Buyout: Big Shareholder Southeastern Will Indeed Fight The Deal

Southeastern Asset Management hopes to make life difficult for Michael Dell. As the largest outside shareholder of the eponymous company, Southeastern says it doesn’t support the cheaply priced buyout led by the billionaire founder.

Southeastern believes the price is much too low and will vote against the proposed deal. Southeastern values the company at $23.72 a share, greater than the $13.5o to $13.75 a share that Dell and his partners are offering.

“We would have endorsed a transformative transaction that would have provided full and fair value to Dell’s public shareholders, including a leveraged recapitalization or a go-private type sale where current shareholders could elect to continue to participate in a new company with a public stub,” Southeastern said in a SEC filing. “Unfortunately, the proposed Silver Lake transaction falls significantly short of that, and instead appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders.”

Dell responded to Southeastern’s comments by saying a lengthy review had decided the buyout was best for investors.

Southeastern is run by a pair of famed, if recently contentious, investors. Staley Cates and O. Mason Hawkins have managed the firm since the early 1990s, making a name for themselves through contrarian stock picking and bouts of activism. Cates and Mason last year shook-up the board of Chesapeake Energy, bringing in directors who would later force out co-founder and chief executive Aubrey McClendon. Beyond that major investments in Chesapeake and Dell, as well as General Motors, Allied Irish and Olympus, tarnished the $33-billion asset manager’s investing record and returns. (For more on this Dixieland duo, see: Two Celebrated Investors Want To Fix Their Funds–And Chesapeake Energy.”)

Earlier this week, Forbes estimated that Southeastern could book more than $1 billion in losses if the buyout occurred in the proposed range. Southeastern says its loss would be much more modest but total hundreds of millions of dollars. Southeastern now owns 8.5% of Dell, more than 147 million shares, meaning Southeastern continued to added to its investment after it reported 130 million shares in September.

Hawkins and completed Cates a lengthy sum-of-the-parts valuation of Dell and blasted the founder and private equity shop Silver Lake Partners for low-balling. Here’s their breakdown:

Source: SEC Filing

Southeastern believes that Michael Dell’s presence will hinder the traditional period in which other suitors can submit competing bids. Even if Dell was to spin off or sell business units, Hawkins and Cates say, the company could raise more than the buyout price.

Another alternative, they say, is a leveraged recapitalization. A process that would pay a special dividend to shareholders and wouldn’t force them out of the company.

That Southeastern didn’t join the buyout group is more than a touch ironic. Southeastern, while searching for stocks fetching at least a 60% discount to its estimated value, also pays careful attention to company management. (It also holds considerable positions in Loews Corp. and FedEx.) Southeastern’s size and reputation allow it build large positions and keep a voice in the running of the company.

Michael Dell and his PC maker seemed a perfect example of a Southeastern investment: Dell owned a large stake in the company—245 million shares, 14.1%, at last count—which would keep his interests aligned with outside shareholders…or at least so Southeastern believed. Now, Dell is pressing to complete the buyout, a deal that does indeed value the company for a low sum (at just eight times earnings).

A Southeastern spokesman declined to comment.

The language used in the SEC filing seems to reflect Southeastern’s agitation. The investment firm calls the buyout woefully inadequate and grossly undervalued, going on to register its extreme disappointment. Not too surprising when you consider Southeastern would lose a large sum if Dell proceeds.

Yet, Southeastern could be playing a risky game. If its activism succeeded and Dell scrapped his plans, the outcome might be worse. Investors could lose confidence, and the shares could again dip down into single-digits. “I think it could be counter-productive in the short term,” says Morningstar analyst Carr Lanphier. “But if you’re confident in the long-term and think it can bounce back, then maybe you do something like this.” Just how much can Southeastern accomplish without help from other big shareholders? “I don’t think 8.5% is going to be the deciding vote one way or another,” Lanphier says.

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How does that comment make any sense? Southeastern could always sell at the offer price if they thought that Dell was sinking. And anyone can sell their shares currently at or near the LBO price now since today’s close was cents from the LBO offer. These guys at Longleaf having been doing this a long time, and they know what they are doing.

Taking the market’s advice to determine what things are worth is a bad idea that will leave you penniless.

Under such flawed thinking, maybe you have would purchased Zynga last year at this time because that is what “the market said it was worth”, but then you would have learned an important lessen when it fell 80% in price six months later. There is a world of examples, but anyone who doubts this should read about “value investing”.

I bought Dell at $14/share because I thought it was worth at least 7x EBITDA ($18 per share on the open market; to a private buyer, add 15% premium to get to 22.50 – - anyway you turn it, Southeastern is correct!).

Michael Dell and his private equity partners likely think the same, as who would ever pay $20 per share and risk so much of their money if they didn’t think that they were getting the Deal of a Lifetime. Michael Dell is a smart guy, and by offering to take Dell private with much of his own money, he is saying that Dell is worth approximately, and at least, 33% more than his offer, or at least $18 per share.

ps. the author of this comment is also the author of “How I Made 5 Times My Money On Starbucks With Minimum Risk”, which you can search for on the Internet.

I thought that I was the only one who thought that Michael Dell was acting like a crook with this LBO offer – - attempting to rip-off long standing shareholders, but alas, I see I am not alone.

Michael Dell is acting like a selfish __________ with this deal, looking out for himself only while putting the screws to those who have believed and stood by him board meeting after board meeting. Not since Ken Lewis purchased Countrywide and Merrill Lynch in 2008 have I felt more betrayed by a CEO.

Dell has been on the wrong side of Apple for sometime, and finally, just when the pendulum is about to swing the other way, Michael decides he is going to spank the shareholders and take the company private, burning the very people who tolerated his wasting billions of dollars on share buybacks over many years (instead of Dell paying substantial dividends), which buybacks in essence now have allowed Michael enough leverage to concoct such a villainous (yet perfectly legal) scheme.

For selfish Michael Dell, of course, this deal is the no-brainer of the century – - if I were Michael Dell, and purely out for myself, I would do the same. Instead, I am a public Dell shareholder, and I have been furious for a week over this paltry offer.

We public shareholders are getting shafted by Michael Dell.

If you like this LBO offer, if you think it is a good deal and you own shares, then fine. Sell you shares on the open market ASAP (today the share price approached within pennies the LBO offer price of $13.65), but whatever you do, DON’T BE A PATSY AND FALL FOR MICHAEL DELL’S ONE SIDED, PATHETICALLY CHEAP OFFER.

Don’t just take my word for it, or the word of Southeastern Management, either.

Instead, consider this:

If Michael Dell were fair, say, like Warren Buffett is and was, Mr. Dell would allow existing shareholders to ROLL their stock into this deal just like Berkshire Hathaway did with its recent purchases of BNI (2009) and Wesco Financial (2011).

In that way, anyone who wanted to sell could get cash, and anyone who wanted to hold their shares could join the deal (I made a lot of money in rolling both my BNI and WSC shares as at the time of their respective acquisitions as I thought that both stocks were undervalued.) Sure, Dell would still be public – - but except for Michael Dell who would have to share some of his shares, who would care, since Dell would have a much smaller stockholder base.

So why does not DELL offer this deal to shareholders since there is plenty of cash available now that the banks and private equity are lined up?

The reason is that Michael Dell and Silverlake hope to STEAL THE COMPANY from the public shareholders using cheap debt and a currently deflated stock price, and indeed because they know that plenty of us shareholders indeed would roll our shares and buy into this deal at this cheap price.

Just read the boards at Seekingalpha to see others who agree with me.

And by the way, I own Dell at about $14.30 share, so I am only losing 60 cents per share, but I know DELL IS WORTH WAY MORE THAN 4.8x EBITDA; Michael Dell also knows this, and so does Silverlake Partners and their banks. I just hope the public shareholders know this as well, and don’t vote like the patsies that Michael Dell hopes that, and is banking on, they are…

ps. the author of this comment is also the author of “How I Made 5 Times My Money On Starbucks With Minimum Risk”, which you can search for on the Internet.